Two years ago, I wrote an article that examined why private equity firms were increasingly investing in enterprise cloud software companies. Back then, it was clear to me that traditional private equity firms from the East Coast and elsewhere were starting to ramp up their activity in Silicon Valley, where many top cloud companies are located.

In the article, I explained the attraction of enterprise cloud companies for private equity firms, noting that the firms love the recurring revenue stream—the fact that cloud customers pay a subscription fee every year to run the software. Some private equity firms were also quick to recognize that companies across every industry are now racing to modernize their infrastructure and digitally transform their business, which serves as a further catalyst for cloud software providers.

Now, two years later, this trend has accelerated, with more and more private equity firms setting their sights on enterprise cloud software. In recent activity, Bain Capital Private Equity made an investment of $750 million in enterprise cloud company Nutanix and private equity firm Abry Partners acquired CloudWave, a cloud and managed-services provider in the healthcare sector.

At one time, there were only a handful of specialist tech-buyout firms like Vista Equity, Silver Lake and General Atlantic. But today, a growing number of generalist firms are moving into the market and executing impressive deals, especially in the cloud space.

For example, Advent International, one of the largest global private equity investors, deepened its commitment to the technology sector with a new office in San Francisco and a $2 billion global tech fund. Meanwhile, KKR launched its $2 billion Next Generation Technology Growth Fund last year, following on the heels of other prominent tech-buyout funds from the likes of Bain Capital and Blackstone.

Indeed, according to Pitchbook, there has been a dramatic increase in the number of VC-backed tech companies that are exiting to buyout firms. Pitchbook reports that between 2000 and 2019, private equity buyouts went from accounting for an anemic 2.4% of VC exits to a staggering 19.2%.

We believe private equity activity in the space will further gain steam as a diverse range of private equity firms start to target the enterprise cloud market.

What is particularly new and noteworthy is that many private equity firms are not taking control positions in their portfolio companies when they enter the cloud market. Now, big private equity firms are raising growth funds and are content to take a minority position in cloud companies. As a result, they look less like buyout firms and more like the late-stage venture capital firms that typically are involved in leading Series C and Series D financings.

Thoma Bravo, for instance, recently closed three new funds last year totaling $22.8 billion in capital commitments. The smallest of those funds, the $1.1 billion Explore Fund, is exclusively focused on earlier stage Series B/C software companies. Vista, for its part, launched the $850 million Endeavor Fund II targeting high-growth enterprise software companies with $10 million to $30 million in annual recurring revenue.

Another intriguing trend we have seen is that a growing number of private equity firms are now pursuing a bolt-on strategy in which acquisitions of cloud software providers are being done through companies that are already owned by the buyout funds, rather than the funds directly. In essence, private equity firms are turning their portfolio companies into acquisition platforms, enabling them to snap up more startups in the cloud sector and giving these platforms increased pricing power and scale in the market.

A great example of this is Optimizely, a cloud-based progressive delivery and experimentation software provider that was acquired by Episerver via its financial sponsor Insight Partners for $600 million in October 2020. Insight Partners purchased Episerver for $1.16 billion in 2018 and, since then, Episerver has been successfully pursuing a bolt-on strategy in the software space.

So what does this all mean for enterprise cloud companies? First, it means there is more capital available from more and different firms—and that translates to greater funding options to choose from for these companies as well as, potentially, higher valuations.

It also means that, if your company is part of a bolt-on acquisition, you instantly have a receptive new customer base at your disposal. You will receive valuable introductions to all the customers of the parent company that acquired you.

Also noteworthy is that traditional private equity firms have very large companies in their buyout portfolios that they can introduce a Series B/C/D cloud company to. This is different than owning a cloud company and buying and cross selling.  

These large private equity firms have teams of operating executives that support their buyout funds to help companies improve their businesses. They are now in the position of making their people, knowledge and experience available to the early- and mid-stage cloud companies in their growth portfolios.

At Cloud Apps Capital Partners, we appreciate the fact that, as the cloud companies in our portfolio prepare for their Series C and D funding, there is a much more diverse universe of investors that are capable of leading those late-stage $50 million to $100 million financings—and that are also capable of paying higher multiples.

This is all great news for early-stage enterprise cloud companies that are preparing to take the next leap forward. We at Cloud Apps Capital Partners are thrilled that more large private equity firms are choosing to enter the cloud market and we welcome the opportunity to engage with these new players.

Because everyone wins. private equity firms gain access to emerging cloud companies that are highly profitable investments. And the cloud companies, for their part, gain access to new sources of capital as well as high-value customer introductions, which will supercharge their business.